what to do with a house that is paid off, rented out and getting a poor return?

[vbplease]

Our family home that was paid off a long time ago has been rented out for quite a few years. The problem is a lot of equity is sitting in it doing nothing.. the return on it is pretty ordinary 2-3%.

One option is to keep it, for a few reasons. The area should soon be re-zoned from low to medium dens res. The house is on a large block (1486 sq.m) and could be turned into townhouses. Its in walking distance to a large shopping centre. Great access to the city and coast. In general it has good resale value in the future.

In keeping it my sister would buy a share and make it her PPOR, and I'd buy a share as a IP. Good tax savings for me, but not so much for my sister and she'd have to look after such a big house and worry about sub-letting. Still we get a low return in the short term.

In selling it, my parents invest their cash in a term deposit or similar. Then later in the year kindly help out my sister and I in buying a new house.

Do you guys have any advice in keeping or selling this kind of house? or marketing a house for a developer to buy?

 

[The Y-man]

In keeping it my sister would buy a share and make it her PPOR, and I'd buy a share as a IP. Good tax savings for me, but not so much for my sister and she'd have to look after such a big house and worry about sub-letting. Still we get a low return in the short term.

Can you elaborate this bit?

Cheers,

The Y-man

 

[always_learning]

Avoid selling now, it sounds much better to keep it. It is a large block so you could get 4~6 townhouses if zoned medium density. Call the council and ask for options for rebuilding.

The key idea like the game of monopoly is to increase the value of the use of the land.
I would avoid 50/50 ownership with sister unless you both a clear exit plan is agreed on (ie redevelop to 4 units get 2 to keep or sell as you wish). Who knows if one of you gets sick, divorced, bankrupt or married. If someone asked me at the age of 23 I would have said I was NEVER EVER getting married and NEVER EVER having kids, now at age 41 I have been married 15 years with 2 kids!

Your mum and dad would be fools to sell to put the money in the bank long term, they are not dead yet and will need to fund a long and healthy retirement. Better they get in on any medium density redevelopment.

 

[vbplease]

Can you elaborate this bit?

Cheers,

The Y-man

my sister would buy half, i'd buy maybe 1/8th, and my parents keep the rest. My sister would move in with her family and rent out the granny flat. She would be paying a loan for a PPOR - not so good for her. And my loan would be as an investment.

I think the return would still be low because the released equity is now being paid as a loan by my sister and the rental income from the granny flat is not that much...

 

[vbplease]

Avoid selling now, it sounds much better to keep it. It is a large block so you could get 4~6 townhouses if zoned medium density. Call the council and ask for options for rebuilding.

The key idea like the game of monopoly is to increase the value of the use of the land.
I would avoid 50/50 ownership with sister unless you both a clear exit plan is agreed on (ie redevelop to 4 units get 2 to keep or sell as you wish). Who knows if one of you gets sick, divorced, bankrupt or married. If someone asked me at the age of 23 I would have said I was NEVER EVER getting married and NEVER EVER having kids, now at age 41 I have been married 15 years with 2 kids!

Your mum and dad would be fools to sell to put the money in the bank long term, they are not dead yet and will need to fund a long and healthy retirement. Better they get in on any medium density redevelopment.

I agree 50/50 ownership or any other split is dangerous because of different goals.. thats why i think it would be better to sell.

My parents would never put money in the bank long term. but, term deposits give 8%, the rental income is about 2%.
I know the huge costs of buying selling, but I think buying a few houses later in the year would be better?

 

[Belu]

what do your parents need at the moment? Income or cap growth?

that size block, with the potential to move to mid-density would give you some VERY decent mid-term growth.

even if you don't want to do the development you can get the plans and on-sell.

Have you thought about holding, doing a 6 townhouse dev, you and sis get 1 each and parents sell 4? would probably still work out better then selling now?

 

[Aaron Sice]

STOP RIGHT THERE.

when you say poor yield - it that off your intial purchase price or current value?

because that's a massive difference.

either way, if the house is paid off, and it's soon to be re-zoned then hang on for dear life.

remember, the minute you sell a property you forfiet all future CG. and considering what is around the corner, you selling will just make someone else rich.

why doesn't your sister rent it for the moment? nothing really changes, all monies and positions are secure.

THEN when it gets re-zoned you buy, develop and sell and your cash "downtime" is minimised.

that's what i'd do anyway.

 

[Rockstar]

I agree 50/50 ownership or any other split is dangerous because of different goals.. thats why i think it would be better to sell.

My parents would never put money in the bank long term. but, term deposits give 8%, the rental income is about 2%.

Remember the returns are CG + yield which long term should be definitely more than 8%. It sounds like a good CG area you are in and huge potential for development down the track.

I would be keeping it - but that is because I have a liking for development.

 

[wylie]

Things that spring to my mind -

1. Where are your parents living now? Do they need to sell this house or is only because the yield is low?

2. Where do you live now, and what is your family situation?

3. Where is your sister living now, and what is her family situation?

I would not want to enter into a 1/8 IP split with 1/2 PPOR with your sister, because it just sounds messy, and trouble down the track.

If there is a chance of rezoning for a better or higher use, I would try to hold it. Also, is this house pre 1985? If so, once you or your sister buy a portion of it, it will lose its capital gains tax-free status.

 

[vbplease]

thanks for the replies. I'll try to answer them in one.

i guess my parents don't need the income, capital growth would be better.

getting plans for the development sounds a good idea, although expensive??
do you need to have architectural/civil/structural plans council approved in order to sell with the tag line "with building approval"?

the yield is poor in respect to the currant value.

parents live an hour away down the coast. I'm living in the same area and tied down with my first home for a year. sis is renting and keen to get in the market with her husband.

agreed going into the house with 1/2 & 1/8 fractions is messy.

the land was bought and house built prior to 1985. So CGT would start from when from the day other family members buy into it?

developing it would be my dream since i'm a structural engineer, dad's a civil eng. but doing a family project has got "trouble" written all over it. not to mention coming up with the capital for the development?

 

[LynnH]

If your sister wants to get into the property market, would it be possible for your parents (since they don't need the income) to get an LOC on the IP and have the sister use that as a deposit on her PPOR (with appropriate repayment arrangements)? That way, your parents avoid selling the IP and retain all the future benefits.

Obviously, I have no idea of your family situation, so perhaps this may not work. But selling the property would be the last thing I would do, IMHO.

Cheers
LynnH

 

[Belu]

getting the funds should be ok - can you not get a construction loan? espeically with it being net of any current loans? what is the equity in it?

 

[vbplease]

Lynnh, wouldn't a new loan on the house restart the CGT? none payable so far..
I don't think my parents can turn it into an IP (regarding tax deductions) works since its been paid off already.. although releasing the equity would help.

If your sister wants to get into the property market, would it be possible for your parents (since they don't need the income) to get an LOC on the IP and have the sister use that as a deposit on her PPOR (with appropriate repayment arrangements)? That way, your parents avoid selling the IP and retain all the future benefits.

Obviously, I have no idea of your family situation, so perhaps this may not work. But selling the property would be the last thing I would do, IMHO.

Cheers
LynnH

 

[vbplease]

we havn't actually looked into getting a construction loan. this should be looked into further.. it was valued a couple years back at about 750k. would be interesting to know if a construction loan could finance 4-5 townhouses, and then let us rent them out long term.

getting the funds should be ok - can you not get a construction loan? espeically with it being net of any current loans? what is the equity in it?

 

[Belu]

I don't see why not, you should be able to find somewhere. How much will the new townhouses be worth? $400k?

Might be worth getting the place revalued, if it comes in at say $900k+ you may be able to get the loan based just on the current value rather than future value.

But this is all dreaming without re-zoning isnt it?

 

[LynnH]

Lynnh, wouldn't a new loan on the house restart the CGT? none payable so far..
I don't think my parents can turn it into an IP (regarding tax deductions) works since its been paid off already.. although releasing the equity would help.

I'm not quite sure what you mean when you say "Wouldn't a new loan on the house restart the CGT?"

If your parents former PPOR has been "rented out for quite a few years" (as you said in your first post) then it is already an IP, and you parents would (or should) have been declaring rental income and claiming all the usual rental property expenses.

If there is no CGT payable so far, I presume the property (the former PPOR, now IP) was purchased before 19 September 1985 (before CGT was introduced). If this is the case, there will never be any CGT payable when it is eventually sold, regardless of how it has been used in the intervening period. The '6-year rule' would not apply in this case, since it is a pre-CGT asset.

If the property was purchased after 19 September 1985, then CGT will be payable for the portion of time that the property has been used as an IP unless the '6 year rule' applies. For this to apply, your parents must have moved out of their PPOR and rented elsewhere (i.e. not purchased another PPOR) and then returned to live in their PPOR within 6 years of first moving out. If they sell after this time, then the property will be CGT-free. If they sell when the property is being used as an IP, then CGT will be payable on a pro-rata basis.

Your parents can use the equity in this property (by borrowing against the property as security) in any way they wish. Using the equity does not, of itself, create a CGT liability. If they borrow for private purposes (e.g. to gift the money to your sister as a deposit on her PPOR), then your parents cannot claim the interest they pay on this loan as a tax deduction - if, however, they borrow and on-lend this money to your sister at the same rate of interest they are paying, then their tax position will be unchanged (declare interest received from sister as income, claim interest paid on loan as deduction).

I hope this has been of some help. As always, please tell your parents to run their plans by a property-savvy accountant before undertaking any such action.

Cheers
LynnH

 

[vbplease]

it will be worth crunching some numbers i.e. how many we townhouses can fit on the block, cost of building and the serviceability when renting them out.

the reason we are so sure it will be re-zoned is due to 4 different blocks of townhouses being built in adjacent streets in the past 5years. Its also been mentioned in the local paper..
The competition of the other townhouses isn't a good point, but I guess this is the way our cities are heading... large blocks turning into townhouses.

I don't see why not, you should be able to find somewhere. How much will the new townhouses be worth? $400k?

Might be worth getting the place revalued, if it comes in at say $900k+ you may be able to get the loan based just on the current value rather than future value.

But this is all dreaming without re-zoning isnt it?

 

[vbplease]

Lynnh I think you summed it up right.

As mentioned before, If myself or sis get a loan on the property then we'd pay CGT from the day we buy in - I was confusing this with my parents re-mortgaging then starting to pay CGT, which is not the case.

It has been treated as an IP since renting it out, but it will never get the benifits of claiming interest on a new loan as an IP - unless the house is knocked down and its a new development? is that right?

 

[LynnH]

vb

If your parents borrow against their former-PPOR-now-IP for investment purposes, then the interest is claimable against the income they receive from that investment, whatever the nature of that investment (e.g. shares, IPs).

If they knock the house down to undertake development, then a whole different 'set of rules' apply - and the only person who can advise you on that would be an accountant.

Cheers
LynnH